Asked by
Mickey Raine
on Dec 20, 2024
Verified
Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000. The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset) . The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The working capital investment is recovered in the final year of the project. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.
A) $32,000
B) $27,000
C) $24,000
D) None of the above
MACRS Depreciation
Modified Accelerated Cost Recovery System; a method of depreciation used for tax purposes in the United States that allows for faster expense deductions.
Working Capital
The difference between a company’s current assets and current liabilities, used to fund the company's day-to-day operations.
Marginal Tax Rate
The rate at which the last dollar of income is taxed, indicating the percentage of tax applied to your next dollar of income.
- Assess the net cash flows from capital projects after taxation.
- Compute the impact of changes to working capital on the financials of a project.
- Understand how terminal values and growth assumptions influence project evaluation.
Verified Answer
KI
Learning Objectives
- Assess the net cash flows from capital projects after taxation.
- Compute the impact of changes to working capital on the financials of a project.
- Understand how terminal values and growth assumptions influence project evaluation.